oldfart
Older than dirt
I know I haven't posted much in the last few weeks, but I'll try to do better. Today the CBO released its 2014 long-term budget projections. Of course no one has had time to read the whole thing yet, but what I have skimmed is disturbing. The report can be found here:
http://www.cbo.gov/sites/default/files/cbofiles/attachments/45471-Long-TermBudgetOutlook.pdf
My bone to pick with the report is that it seems based on junk economics and is unduly alarming about the growth of the deficit. It seems written by the worst hacks among the deficit hawks. In particular, here is what makes it bad economics.
1. The projections rest heavily on increases in spending in the out years. Most of this is in two categories, health care spending and net interest. I'm not sure that the health care costs reflect the improvement in cost controls we are seeing in the ACA. Beyond that, there are some administrative changes that would dramatically reduce the increase in these costs which are probably going to be made eventually, such as negotiated drug contracts for all government agencies. Factor in reasonable assumptions about these and health spending as a percentage of GDP becomes flat. The net interest forecast assumes a return to 40-year averages, but there is absolutely no theoretical justification for this. The best theory indicated the Wicksellian long-term rate of interest is falling. If the Fed decides to raise interest rates in a soft economy, the CBO estimates may be right, but the economy will tank. The CBO estimate that spending will rise from the current 21% to 26% by 2039 seems to me to be inflated. If health care expenses rise from 4% to 4.5% (not 6%) and net interest rises from 2% to 2.5% (not 4.5%), total spending only increases to 22.5% of GDP. The projected revenue increase is from 17.5% to 19.5%. That keeps the deficit at 3% of GDP and the accelerating deficit argument is moot.
2. CBO drags out the tired and discredited idea that deficits crowd out private investment. With businesses sitting on trillions of dollars of excess cash, it seems delusional to me that anyone would advance this ludicrous argument. CBO is also projecting the virtual elimination of all public investment, which is a more severe threat to economic growth than any deficit could ever be. It's bad economics and a prescription for economic catastrophe. You want a permanent recession, this is how you get it.
I'm familiar with CBO methodology and I understand why they made the choices they did. What I don't understand is why they chose to couch the results in a deficit hawk setting as opposed to an analysis that promoted economic growth. It reads like they are channeling the R & R paper of ill fame, right down to implying the bogus 90% threshold.
CBO looks at three alternative scenarios. The first involves tax cuts with no alteration in spending. This produces the worst results with output stagnating. The second mixes tax increases with reductions in entitlement programs, and results in better results. The third is a more aggressive deficit reduction and it also produces an enhancement in growth. The best strategy, targeted tax increases, maintaining safety net programs, and increased public investment, is not even considered. This is strange given that a month ago CBO issued a report on the return to public investment. I guess they don't read their own reports.
In short, the dangers of future deficits are overblown and based on bad economics and the remedies examined fall into the bad or worse categories. Maybe the days of paying any attention to the CBO long term model are over. This one is worse than useless, and it seems intentionally so.
http://www.cbo.gov/sites/default/files/cbofiles/attachments/45471-Long-TermBudgetOutlook.pdf
My bone to pick with the report is that it seems based on junk economics and is unduly alarming about the growth of the deficit. It seems written by the worst hacks among the deficit hawks. In particular, here is what makes it bad economics.
1. The projections rest heavily on increases in spending in the out years. Most of this is in two categories, health care spending and net interest. I'm not sure that the health care costs reflect the improvement in cost controls we are seeing in the ACA. Beyond that, there are some administrative changes that would dramatically reduce the increase in these costs which are probably going to be made eventually, such as negotiated drug contracts for all government agencies. Factor in reasonable assumptions about these and health spending as a percentage of GDP becomes flat. The net interest forecast assumes a return to 40-year averages, but there is absolutely no theoretical justification for this. The best theory indicated the Wicksellian long-term rate of interest is falling. If the Fed decides to raise interest rates in a soft economy, the CBO estimates may be right, but the economy will tank. The CBO estimate that spending will rise from the current 21% to 26% by 2039 seems to me to be inflated. If health care expenses rise from 4% to 4.5% (not 6%) and net interest rises from 2% to 2.5% (not 4.5%), total spending only increases to 22.5% of GDP. The projected revenue increase is from 17.5% to 19.5%. That keeps the deficit at 3% of GDP and the accelerating deficit argument is moot.
2. CBO drags out the tired and discredited idea that deficits crowd out private investment. With businesses sitting on trillions of dollars of excess cash, it seems delusional to me that anyone would advance this ludicrous argument. CBO is also projecting the virtual elimination of all public investment, which is a more severe threat to economic growth than any deficit could ever be. It's bad economics and a prescription for economic catastrophe. You want a permanent recession, this is how you get it.
I'm familiar with CBO methodology and I understand why they made the choices they did. What I don't understand is why they chose to couch the results in a deficit hawk setting as opposed to an analysis that promoted economic growth. It reads like they are channeling the R & R paper of ill fame, right down to implying the bogus 90% threshold.
CBO looks at three alternative scenarios. The first involves tax cuts with no alteration in spending. This produces the worst results with output stagnating. The second mixes tax increases with reductions in entitlement programs, and results in better results. The third is a more aggressive deficit reduction and it also produces an enhancement in growth. The best strategy, targeted tax increases, maintaining safety net programs, and increased public investment, is not even considered. This is strange given that a month ago CBO issued a report on the return to public investment. I guess they don't read their own reports.
In short, the dangers of future deficits are overblown and based on bad economics and the remedies examined fall into the bad or worse categories. Maybe the days of paying any attention to the CBO long term model are over. This one is worse than useless, and it seems intentionally so.
